Consider a competitive market served by many domestic and foreign firms. The dom
ID: 1222057 • Letter: C
Question
Consider a competitive market served by many domestic and foreign firms. The domestic demand for these firms’ product is Qd = 1300 - 2.5P. The supply function of the domestic firms is QSD = 50 + 1.5P, while that of the foreign firms is QSF = 250.
Instructions: Round your answers for equilibrium price to the nearest penny (two decimal places). Round your answers for equilibrium quantity to one decimal place.
a. Determine the equilibrium price and quantity under free trade.
Equilibrium price: $
Equilibrium quantity: units
b. Determine the equilibrium price and quantity when foreign firms are constrained by a 100-unit quota.
Equilibrium price: $
Equilibrium quantity: units
c. Are domestic consumers better or worse off as a result of the quota?
(Click to select)Worse offNeither better nor worse offBetter off
d. Are domestic producers better or worse off as a result of the quota?
(Click to select)Better offWorse offNeither better nor worse off
Explanation / Answer
(a) Under free trade, Qd = QSD + QSF
1300 - 2.5P = 50 + 1.5P + 250
4P = 1300 - 300 = 1000
P = 250.00
Q = 1300 - (2.5 x 250) = 1300 - 625 = 675.0
(b) QSF = 100
1300 - 2.5P = 50 + 1.5P + 100
4P = 1300 - 150 = 1150
P = 287.50
Q = 1300 - (2.5 x 287.5) = 1300 - 718.75 = 581.25
Q ~ 581.3
(c) Since price has increased due to quota, domestic consumers are worse off (since consumer surplus will decrease).
(d) Since price has increased due to quota, domestic producers are better off (since producer surplus will increase).
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